Lonestar Inc. is planning to expand operations into the Central United States and needs to raise funds for the expansion. The firms investors require a 14 percent rate of return, the firms bonds have a yield to maturity of 7 percent, and the firms marginal tax rate is 21 percent. The firms balance sheet at the end of 2019 appears below. It is important to note that the firms bonds were selling at par value and its stock was selling for a price of 2.25 times its book value at the end of 2019. Table 2: Balance Sheet for 2019

Assets		Debt & Equity
Cash	$ 2,010,000
Accounts Receivable	4,580,000
Inventories	1,540,000
Total current assets	8,130,000	Long-term debt	$ 8,141,000
Net property, plant, & equipment	32,575,000	Common equity	32,564,000
Total assets	40,705,000	Total debt & equity	40,705,000

A. Complete the following table to determine Lonestars capital structure and the weighted average cost of capital (WACC). (7 points)

Table 3: WACC for Initial Conditions

Component	Market Value Balance Sheet	Proportion	After-tax Cost	Product
Long-term debt
Common equity
Totals			WACC =

B. Assume Lonestars stock price increases to 3.25 times its book value and the cost of equity increases to 15 percent. Complete the following table to determine the firms new WACC? Assume the marginal tax rate and cost of debt remain the same. (7 points)

Table 4: WACC for New Conditions

Component	Market Value Balance Sheet	Proportion	After-tax Cost	Product
Long-term debt
Common equity
Totals			WACC =